Kenya's Senate has passed the 2022 Startup Bill, setting the stage for a transformative shift in the country's burgeoning startup ecosystem. If President William Ruto signs the bill into law, it will mandate Kenyan startups to allocate at least 15% of their expenses to research and development (R&D) and maintain wholly Kenyan ownership to qualify for legal recognition and government support.

The bill introduces a range of incentives, including tax breaks, grants, incubation programs, and credit guarantee schemes aimed at boosting innovation. However, critics argue that the bill's requirement for wholly Kenyan ownership could stifle growth by excluding startups with foreign co-founders or foreign investors that do not meet the bill's ownership criteria.

Such startups, which have been a significant part of Kenya's entrepreneurial rise, would be unable to access key benefits, limiting their growth potential. Many successful Kenyan startups have attracted significant foreign capital and have foreign founders or co-founders whose contributions and expertise have positioned Kenya as an African innovation hub.

The bill's local ownership mandate could exclude such startups, potentially undermining the country's appeal as a magnet for international venture capital. Kenyan startups have attracted millions of dollars in VC funding over the last decade, highlighting the country's growing appeal for investors. In 2024, the country's startups raised $638 million (KES82.3 billion), according to a report by Africa the Big Deal.

On the other hand, the 15% R&D expenditure mandate has been received more warmly as it aims to spur deeper innovation within the Kenyan startup ecosystem, encouraging founders to secure patents, register software, and engage in critical research—all vital for staying competitive globally. As Kenya's startup sector matures, this requirement will push companies to prioritize long-term innovation and intellectual property.

If President Ruto signs the bill into law, the Registrar of Startups will oversee startup operations, including research activities and tracking the flow of venture funding. While this oversight could improve accountability, it also raises questions about the burden of compliance for startups already dealing with tight budgets and complex business challenges.

Steve Okoth, a tax director at BDO East Africa, described the 15% R&D requirement as a move to "institutionalise" innovation among founders and enhance "competitiveness" in the startup ecosystem. However, he argues that it would strain startups as most operate on thin margins and cannot prioritise cash flow for survival over discretionary spending like R&D.

"This approach may be overly prescriptive. Startups are diverse, and their ability to innovate often depends on their specific industry, stage of development, and business model. A blanket mandate could be counterproductive," Okoth said. "A more flexible, incentive-driven approach that accounts for the realities of Kenya's startup ecosystem would be more effective in fostering sustainable innovation and growth."

The passage of the Startup Bill has sparked a heated debate about the role of government in fostering innovation and entrepreneurship. While the bill's proponents argue that it will create a more conducive environment for startups to thrive, critics warn that its rigid requirements could stifle growth and innovation. As Kenya's startup ecosystem continues to evolve, the impact of this bill will be closely watched by entrepreneurs, investors, and policymakers alike.